Third Circuit Rules Former Employee Has Standing Even Though Cashed Out of a Plan That Invested in Company Stock

In an important decision, the U.S. Circuit Court of Appeals for the Third Circuit ruled that an employee who had been cashed out of a 401(k) plan nonetheless had standing to sue over questions about the prudence of investments in company stock. The decision in Graden v. Conexant Systems Inc. (No. 06-2337, 7/31/07) follows one by the Seventh Circuit, Harzewski v. Guidant Corp. (No. 06-3752, 6/5/07), that also allowed a cashed-out employee to sue. Both overturned lower court rulings. In Graden, the court rejected the distinction between "benefits" and "damages." Many lower courts have ruled that cashed out employees could not sue for damages, only for denied benefits. But Judge Thomas Ambro, writing for the court, argued that if the employee can reasonably contend that benefits were denied because of imprudent practices, then he or she should have standing. To do otherwise, he concluded, would allow fiduciaries to engage in all sorts of imprudent behaviors, avoiding any responsibility simply by paying people out. With two circuits now reaching similar conclusions, even district courts in other circuits may find it difficult to prevent employees from making claims.